Buy the stock market’s next dip

JeffWhite

Jeff White is a full-time trader in Texas. Blending a technical approach with
a thorough understanding of market psychology, money management, and strict
discipline, Jeff has enjoyed success in a variety of market conditions since the
late 1990's.

On a daily basis, White shares his insights at
TheStockBandit.com, an educational
site directed towards active traders. Jeff's willingness to adapt to the trading
environment has allowed him flexibility and versatility in an ever-changing
market.

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A Thanksgiving-week stock-market rally is so cliché, and yet it's exactly what we got. Value-seeking bulls and short-covering bears produced a sizable lift, taking the indexes to levels some 5% above their recent correction lows.

It all happened in “V-shaped” fashion and on light (holiday-related) volume, raising suspicions of whether or not the advance was for real.

The market’s bulls have felt like Rodney Dangerfield for many weeks, getting no respect because they've failed to earn it. They've used even minor strength for raising cash time and again, preventing bounces from gaining any traction.

Last week, that began to change when the bulls produced a lift at a time when it was badly needed. They were desperate for a win, and they got one. Any overly aggressive bear who shorted last week will tell you the bounce certainly felt real, but the question for most is can it last?

Yes and no.

The pace of the rebound is thus far unsustainable, so by that measure it has become extended and therefore a rest is in order. Just as straight-down declines eventually see a rebound or a pause, vertical advances tend not to last; we're seeing that to be true with some Monday selling.

However, the bulls have finally produced the first ingredient they've needed for a potential turnaround: a sizable bounce. That in itself cannot shift the tide for long, but it does provide the best possibility we've seen in a couple of months for what is most important — enough room to pull back into a higher relative low.

Technical traders can all agree that downtrends consist of lower highs and lower lows, and currently we remain in a technical downtrend. It's important to evaluate the price action in an objective way, and doing so tells us that the correction isn't over yet.

There is an anticipatory element to analyzing price, even if it's not acted upon until confirmed, which should not be ignored here. This second piece of the puzzle tells us that merely by the size of this bounce, the door stands wide open for a higher low in the coming weeks.

Last June, we saw a bounce of a similar size, and it led to not just one higher low but a series of them, which took the S&P 500
SPX, -0.88%
to new multi-year highs. Given the tendency of traders to recall recent moves, and the memory the market seems to have, this isn't a bounce to ignore or aggressively sell.

I've been noting to subscribers for a couple of weeks (as well as in the free videos) that the first bounce will provide some opportunity, but that the pullback which follows will tell a much more valuable story as to the resolve of the bulls.

That's when the battle really ensues between bulls and bears. For the past five sessions they've both been playing the role of buyers, which is why the move has been so one-sided.

Once we see a multi-day pullback, we'll be able to gauge downside momentum, weak finishes, and the corresponding volume to better evaluate if the bulls are finally stepping up to place bids into weakness. Should they avoid running for the hills, we'll see a higher low develop. That's the dip which will carry greater hope for the bulls, and which savvy dip-buyers will want to jump on.

In the coming days, keep a close eye on the pace of the pullback, and particularly if we see an absence of weak closes, as that would indicate some subtle bidding taking place. Bears will place equal importance on such developments, as they're now wondering if the next dip is their final covering opportunity for short positions. Both sides would readily identify such a higher low, signaling another green light situation for buying.

Needless to say, we're set for some nice opportunities between now and year-end. The news about the so-called fiscal cliff is likely to take center stage for the media, but as a technical trader, the price action carries the most weight in my decision-making. Conditions are not yet bullish for the intermediate term, but I'm watching for that higher low to emerge, which would create cause for a bullish bias.

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